Boeing Missing An Important Fact

Boeing raised its 20-year industry forecast for new commercial aircraft last week to reflect the recovering global economy. Unfortunately whoever prepared this forecast was missing one very important fact.

Boeing said that by 2029 the global fleet would expand 64% to 30,900 aircraft from 18,890 today. They see this as a $3.6 trillion opportunity for plane sales over the next 20 years for builders of passenger and cargo aircraft. As late as last year their forecast was for 29,000 planes and $3.2 trillion in sales.

According to Boeing the Asia-Pacific region will produce the most opportunities and especially for single isle jets. Boeing said the continued demand for the 737 and the A320 has been much stronger than expected. "We significantly underestimated the demand for this period."

Of the 30,900 airplanes expected to be built and sold during this period about 47% will be single isle jets seating 100-200 people. 45% will e wide-body planes which can sit 200-600 people.

Boeing expects 43% of all flights to originate in the Asia Pacific region by 2029 and that region will be the largest buyer of wide-body jets at 40% of the total demand.

The North American and European markets will also be buying new jets to replace their aging fleet. The world freighter fleet, currently 1,750 planes, is expected to expand to 2,980.

These projections are based on the current slow growth economic recovery model. Boeing says an acceleration of the growth rate would dramatically increase the number of plane flying by 2029 to as many as 36,300 new planes.

I have just one question for Boeing. What will fuel this enormous fleet of planes?

According to the U.S. government airlines and commercial aviation consumed 14.7 billion gallons of jet fuel and aviation gasoline in 2005 when the world economies were healthy. That equates to approximately 350,000,000 barrels of jet fuel.

Since a barrel of oil does not distill directly into a barrel of jet fuel that implies we are going to need a lot more oil. A standard barrel of oil produces about 4.07 gallons of jet fuel and 18.56 gallons of gasoline. Aviation gasoline is only about 3 gallons of that 18.56 total. For calculation purposes let's assume every barrel gives us 7 gallons of airplane fuel.

If the fleet of aircraft is going to expand by 64% using the slow recovery model (+92% in the robust recovery model) then fuel usage is going to increase by something greater than 50%. Obviously the newer planes are going to be somewhat more fuel efficient but how much remains to be seen. Let's just assume fuel use will rise +55%. That means an additional 8.1 billion gallons of aviation fuel. (14.7 billion times 55%).

That is a challenge because we only get 7 gallons of aviation fuel per refined barrel of oil. That additional 8.1 bg would require an additional 1.15 billion barrels of oil per year or 3.16 million barrels of oil per day. That is using the slow recovery model. The robust recovery model could require nearly twice that amount.

Today there is excess capacity of about five million barrels per day and mostly from Saudi Arabia. According to the IEA we are losing about 4.5 mbpd to depletion each year. We are adding to that capacity about 2.5 mbpd of new production from new finds and reworks of old fields. The IEA says rising demand will equate to about 1.5 mbpd per year for the next five years. If you do the math we are going to be walking not flying very soon.

I threw this table together really quick using the numbers stated by the IEA. When you take the current production and add new production and subtract depletion you get a new starting number for the next year. In reality new production is declining and depletion is rising as the fields get older. However, this snapshot is all you need to understand that there is no possible way there will be 30,000 planes by 2029. I seriously doubt there will be as many planes then as there are today. Flying will be an extreme luxury with multi hundred dollar per barrel oil.

Capacity decline table

The Boeing strategist who put together their forecast is seriously mistaken. That is like saying my rosebush grew a foot this year so 20 years from now it will be 20 feet taller. There are physical constraints to every problem. Starbucks can only put so many stores in the same block. Every person on earth will never have n iPhone and all the easy barrels of oil have been found. New production will never again exceed the depletion rate. There will never be 30,000 new planes by 2029.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.